Santa Claus is coming to town! Stocks surged to new highs yesterday as the Administration announced that it had reached a tentative agreement with China on the Phase One deal. No details on the yet to be signed deal wasn’t enough to slow down the advance in equities.
N O T E W O R T H Y
- Back to business. It started with a Tweet… of course. The President tweeted early yesterday that a “BIG DEAL” was close. The Tweet was enough to pull markets out of the red and into positive territory. As the day wore on with no further details other than minor chatter, stocks faded a bit only to surge into the close on news that the two sides had reached a deal in principal. Later, WHILE YOU ATE, the President signed off on the agreed upon terms. First, some perspective before we get into the assumed details. A deal “in principal” is nothing new, we have had that since early October and the President signed off on that as well. Based on bits and pieces of reporting and quotes from “sources close to matter” the deal would include: 1) The avoidance of the Dec. 15th tariff on consumer goods, 2) China will commit to purchasing $40 – $50 billion in US Farm Products and perhaps some energy product, 3) China would agree not to manipulate its currency, and 4) The US may lower existing tariffs by as much as 50% contingent on China making good on its promises. Remember that existing tariffs are between 15%. and 25% on around $350 billion of Chinese imports. Still no mention of intellectual property or trade deficit reduction. We know where both sides stand on human rights issues and Hong Kong, also not surprisingly on the table. So what actually has the trade war accomplished if this Phase One trade deal gets signed? At best, it appears to give a boost to the agriculture sector. US Ag exports to China were around $23 billion in 2017, representing roughly 17% of total farm exports, so the $40 to $50 billion reported commitment can be good, assuming that it is annual. Other than that… nothing really… except a reduction in corporate confidence. While the tariffs have had real negative dollar effects on the US Economy, a reduction in existing tariffs will have a minimal affect on the sluggish economic growth. One thing that could be quite positive is the removal of uncertainty. I often write about markets preferring certainty and one of the hallmarks of this trade war has been uncertainty, though recent market upswings have been speculative on hopes that a deal would get signed. If the deal does, in fact get signed, some uncertainty would be removed which may make corporations more confident in their investing and hiring in 2020. That best-case scenario could be good for the economy and the stock markets. Now back to business… hopefully.
- Brexit row. On the long and winding road of the UK’s sad Brexit saga, there may be some hope! In yesterday’s UK General election, it appears that the conservative Tory Party has won in a landslide. The win, which would reduce the opposing Labour Party’s power, paves the way for Prime Minister Boris Johnson to deliver the swift Brexit he has been promising. In fact, early numbers suggest that the shift in parliamentary seats in favor of the conservatives will enable Johnson to get the votes necessary to go through with the deal he already has on the table with the EU by the January 31st deadline. Not unlike the aforementioned point, the big win for Great Britain at this point is: certainty. Businesses on and off the island nation have been struggling to gear up for the unknown, which may now become known. What the actual divorce means for business health going forward is a whole other matter. Stay tuned for more.
Stocks rejoiced on news that Phase One may actually happen after all. The S&P500 climbed by +0.86%, the Dow Jones Industrial Average traded up by +0.79%, the Russell 2000 advanced by +0.79%, and the NASDAQ Composite Index jumped by +0.73%. Bonds fell in response to the investor confidence and the 10-year treasury yield climbed by +10 basis points to 1.89%. The British Pound Sterling continued its upward surge in response to the Tory win and the US Dollar weakened on yesterday’s trade news.
– The Census Bureau will release Retail Sales which is expected to show a monthly growth of +0.5% compared to last month’s +0.3 advance.
– New York Fed President John Williams will speak today.
– Next week we will get a manufacturing PMI, housing numbers, some regional Fed reports, GDP, Personal Consumption, the PCE Deflator, and University Of Michigan Sentiment Index. Check back for details on Monday.
Let’s get coffee
Tea works as well! I have some slots open next week in our Midtown and Westchester offices. Miami and Boca on the week of January 7th can include iced coffee or tea, if you like. Please reach out and set something up.